| Business Combinations | 7. BUSINESS COMBINATIONS
HealthLine Systems
On March 16, 2015, the Company acquired all of the membership
interests of HealthLine Systems, LLC (HLS), a San Diego, California
based company that specializes in credentialing, privileging, call
center, and quality management solutions for the healthcare
industry. The acquisition of HLS enables the Company to provide a
comprehensive solution set for healthcare provider credentialing,
privileging, enrollment, referral, onboarding, and analytics in
support of HealthStream’s approach to talent management for
healthcare organizations. The consideration paid for HLS consisted
of approximately $88.1 million in cash (taking into account an
estimated closing working capital adjustment). The Company incurred
approximately $1.3 million in transaction costs associated with the
acquisition, of which $965,000 were incurred during the three
months ended March 31, 2015 and $329,000 were incurred during
the year ended December 31, 2014. The transaction costs were
recorded in other general and administrative expenses in the
condensed consolidated statement of income. The results of
operations for HLS have been included in the Company’s
condensed consolidated financial statements from the date of
acquisition, and are also included in the HealthStream Provider
Solutions segment.
A summary of the purchase price is as follows (in thousands):
Cash paid at closing $ 81,379
Cash held in escrow 6,750
Total consideration paid $ 88,129
The following table summarizes the preliminary fair value of the
assets acquired and liabilities assumed as of the date of
acquisition (in thousands):
Cash $ 54
Accounts receivable, net 3,245
Prepaid assets 746
Property and equipment 200
Deferred tax assets 2,586
Goodwill 42,076
Intangible assets 47,200
Accounts payable and accrued liabilities (1,886 )
Deferred revenue (6,092 )
Preliminary net assets acquired $ 88,129
The excess of preliminary purchase price over the preliminary fair
values of net tangible and intangible assets will be recorded as
goodwill. The preliminary fair values of tangible and identifiable
intangible assets, deferred tax assets, deferred revenue, and other
liabilities are based on management’s estimates and
assumptions. The preliminary fair values of assets acquired and
liabilities assumed are considered preliminary and are based on the
information that was available at the time of the acquisition. The
preliminary fair values of assets acquired and liabilities assumed
are subject to change during the measurement period (up to one year
from the acquisition date) as we finalize the valuation of these
items. During the three months ended June 30, 2015, the
preliminary fair value of the customer relationships intangible
asset was increased by $4.6 million. Included in the preliminary
assets and liabilities is an estimated indemnification asset of
$500,000 and a contingent liability of $1.5 million, both are
associated with tax liabilities. The contingent liability is
measured based on management’s estimate of a range of
probable outcomes. The goodwill balance is primarily attributed to
the assembled workforce, additional market opportunities from
offering HLS’s products, and expected synergies from
integrating HLS with other products or other combined functional
areas within the Company. The goodwill balance is deductible for
U.S. income tax purposes. The net tangible assets include deferred
revenue, which was preliminarily adjusted down from a book value at
the acquisition date of $15.2 million to an estimated fair value of
$6.1 million. The preliminary $9.1 million write-down of deferred
revenue will result in lower revenues than would have otherwise
been recognized for such services.
The following table sets forth the preliminary components of
identifiable intangible assets and their estimated useful lives as
of the acquisition date (in thousands):
Preliminary Useful
Customer relationships $ 42,600 13 years
Developed technology 3,700 5 years
Trade names 900 6 years
Total preliminary intangible assets subject to amortization $ 47,200
The amounts of revenue and operating income (loss) of HLS included
in the Company’s condensed consolidated statement of income
from the date of acquisition of March 16, 2015 to the period
ending June 30, 2015 are as follows (in thousands):
Total revenues $ 2,606
Operating loss $ (1,170 )
The following unaudited pro forma financial information summarizes
the combined results of operations of the Company and HLS, which
was significant for purposes of the unaudited pro forma financial
information disclosure, as though the companies were combined as of
January 1, 2014 (in thousands, except per share data):
Three Months Ended Six Months Ended
2015 2014 2015 2014
Total revenues $ 54,604 $ 45,086 $ 106,213 $ 85,337
Net income $ 2,909 $ 1,649 $ 6,840 $ 2,463
Basic earnings per share $ 0.10 $ 0.06 $ 0.24 $ 0.09
Diluted earnings per share $ 0.10 $ 0.06 $ 0.24 $ 0.09
These unaudited pro forma combined results of operations include
certain adjustments arising from the acquisition such as adjustment
for amortization of intangible assets, depreciation of property and
equipment, fair value adjustments of acquired deferred revenue
balances, and interest expense associated with borrowings under a
revolving credit facility by the Company to partially fund the
acquisition. The pro forma combined results for three and six
months ended June 30, 2014 include nonrecurring adjustments of
$1.3 million and $2.9 million, respectively, which reduce net
income due to the revaluation of HLS’s historic deferred
revenue to fair value. The unaudited pro forma combined results of
operations is for informational purposes only and is not indicative
of what the Company’s results of operations would have been
had such transactions occurred at the beginning of the period
presented or to project the Company’s results of operations
in any future period.
The unaudited pro forma financial information for the three and six
months ended June 30, 2015 and 2014 combines the historical
results of the Company and HLS for the three and six months ended
June 30, 2015 and 2014, and the pro forma adjustments listed
above.
Health Care Compliance Strategies
On March 3, 2014, the Company acquired all of the stock of
Health Care Compliance Strategies, Inc. (HCCS), a Jericho, New York
based company that specializes in healthcare compliance solutions
and services. The Company acquired HCCS to further advance its
suite of workforce development solutions, including its offering of
compliance solutions. The consideration paid for HCCS consisted of
approximately $12.8 million in cash (taking into account a
post-closing working capital adjustment) and 81,614 shares of our
common stock. The Company made an additional payment of $750,000
during the second quarter of 2015, upon the achievement of certain
performance milestones within one year post-closing. The Company
incurred approximately $515,000 in transaction costs associated
with the acquisition, of which $365,000 were incurred during the
year ended December 31, 2014 and $150,000 were incurred during
the year ended December 31, 2013. The transaction costs were
recorded in other general and administrative expenses in the
consolidated statements of income. In allocating the purchase
price, the Company recorded approximately $6.2 million of goodwill,
$8.4 million of identifiable intangible assets, $2.6 million of
tangible assets, $625,000 of deferred tax assets, and $2.7 million
of liabilities. Included in the recorded liabilities was an accrual
for contingent consideration of approximately $600,000. The
goodwill balance is primarily attributed to assembled workforce,
additional market opportunities of HCCS’s compliance
solutions, and expected synergies from integrating HCCS’s
products into our platform. The goodwill balance is deductible for
U.S. income tax purposes. The net tangible assets include deferred
revenue, which was adjusted down from a book value at the
acquisition date of $3.2 million to an estimated fair value of $1.7
million. The $1.5 million write-down of deferred revenue will
result in lower revenues than would have otherwise been recognized
for such services. The results of operations for HCCS have been
included in the Company’s consolidated financial statements
from the date of acquisition, and are also included in the
HealthStream Workforce Development Solutions segment.
Goodwill
The changes in the carrying amount of goodwill for the six months
ended June 30, 2015 are as follows (in thousands):
Workforce Patient Experience Provider Total
Balance at January 1, 2015 $ 12,336 $ 24,154 $ 5,424 $ 41,914
Acquisition of HLS
—
— 42,076 42,076
Balance at June 30, 2015 $ 12,336 $ 24,154 $ 47,500 $ 83,990 |
